Days before the Bankruptcy Abuse and Consumer Protection Act of 2005 went into effect on Oct. 17, hundreds of thousands of people rushed to courthouses across the country to file for bankruptcy protection. They were smart to do so. The new law, passed by Congress in response to heavy lobbying by the credit card industry, is designed to discourage perceived abusive filings by debtors. Thus, the new law has made attaining Chapters 7 and 13 protection considerably more difficult for consumers. The changes will also impact business debtors going forward. Whether it will slow down consumer filings remains to be seen.
As basic background, the difference between a Chapters 7 and 13 bankruptcies is as follows. In a Chapter 7 bankruptcy, a debtor’s debts are generally forgiven in their entirety. In Chapter 13, a debtor must repay a portion of his or her debt over the course of three to five years. After successfully making those partial payments, the remaining unpaid portion of the debtor’s debts is forgiven.
The changes to the Bankruptcy Code have been designed to direct more people into Chapter 13. They have also established prerequisites that individuals must meet before filing under either chapter.
Prerequisites
To begin with, debtors must now complete a personal financial management course within 180 days before filing bankruptcy. These courses must be conducted by nonprofit budget and credit counseling agencies that are approved by the Department of Justice.
As part of the course, the agencies will be required to provide individuals with credit counseling and to assist them in performing a budget analysis. To ease the burden of attending these courses, the new Bankruptcy Code provides that the courses may be conducted by telephone or on the Internet.
Upon completion of the course, the agency will provide each participant with a certificate and a debt repayment plan. Debtors who are incapacitated, disabled or on active duty in a military zone are not required to take the course.
After being schooled on financial management, a debtor is free to file a Chapter 7 or Chapter 13 bankruptcy. If filing under Chapter 7, the individual must pass a “means test,” which is a complex income/expense based formula used to determine whether a debtor is eligible to have his or her debts forgiven. If an individual who has filed a Chapter 7 case cannot pass the means test, the case will be dismissed unless he or she consents to having it converted to a Chapter 13 case.
Documentation
Whether they end up in Chapter 7 or Chapter 13, debtors will be required to file many more documents with the court than required under the old Bankruptcy Code. In addition to filing a petition and schedules, the debtor must present pay stubs or other documents reflecting income received within the 60-day period preceding the filing. The debtor must also file the certificate and the debt repayment plan received from the credit counseling agency, and he or she has to hand over to the presiding trustee a federal income tax return for the most recent tax year. Failure to provide the trustee with a tax return is grounds for dismissal of the entire case unless the failure is due to circumstances beyond the control of the debtor.
To show that no one is safe, the new law also requires an attorney, filing a petition on behalf of a client, to certify that he notified the client of various things including the possibility of criminal prosecution for making a false oath or concealing assets.
Waiting periods
The new Bankruptcy Code also changes the amount of time that a debtor must wait after having his or her debts forgiven before filing another bankruptcy. Under the old code, someone who had debts forgiven in a Chapter 7 case was required to wait six years from the commencement of the bankruptcy before seeking Chapter 7 protection again. The new code extends the period to eight years. Alternatively, if the individual would rather file the next bankruptcy under Chapter 13, he or she can do so four years later.
For people who go the Chapter 13 route the first time around, the waiting periods are significantly shorter. Someone who has completed paying his or her debts in a Chapter 13 proceeding must now wait two years before filing an additional Chapter 13 case, or six years before filing a Chapter 7 case.
In sum, the new Bankruptcy Code has tightened the strings under the old code. These changes make it more difficult and cumbersome for an individual to have personal debt forgiven and move on to a fresh start. Next week, we will discuss how other changes in the Bankruptcy Code affect business debtors.